SMALL BUSINESSES WITH ACTIVE INTERNET SITES
MAY BE OPEN TO SUIT OUT-OF-STATE
(2000)

 The Internet was developed in 1969 by the U.S. Department of Defense to explore the possibility of a communication network that could survive a nuclear attack.  Research continued simply because the DOD, it's contractors and universities found that it provided a convenient way to communicate.

 Today, the internet is the lifeblood of our economy, experiencing 68% growth in 1999.  A recent study shows the Internet will generate $507 billion in U.S. revenue this year, up from $307 billion last year, surpassing the airline industry and closing in on the publishing industry.  56 percent, of U.S. companies will sell their products online by the year 2000, up from 24 percent in 1998.  3 million new shoppers will make their first purchase on the net this quarter, pushing the number of online households making purchases to 27 million, exceeding projections of 17 million.  The bulk of this growth is by small businesses with large e-commerce sites selling product and services online, according to the recent University of Texas/Cisco Systems study.

 One issue small businesses must consider before making their presence known on the web is to what extent they want to be sued in every state the site may be accessed.  Generally, under personal jurisdiction rules, a company may not be sued in any state, but rather only in states where the company has minimum contacts, i.e., where it transacts business and could reasonable expect to be hailed into court.  Internet sites, of course, can be viewed from any personal computer, anywhere.

 There are some more general rules of import.  Personal jurisdiction is broken down into two categories: general and specific.  Under general jurisdiction, jurisdiction over an out-of-state company may be permissible, even though the company's contacts are unrelated to the wrong being sued for, so long as the company conducts routine, continuous, or systematic business in the state.  Under specific jurisdiction, a court may exercise jurisdiction over an out-of-state company for causes of action which arise out of the company's in-state activity.

 A review of the recent federal circuit and district court cases in which jurisdiction was sought based on a company's web site show that courts are following some basic trends in this area.  First, virtually all of the Internet jurisdiction cases where a court has found jurisdiction over an out-of-state company have been in the context of specific jurisdiction.  It appears unlikely that a court will subject an out-of-state company to general jurisdiction based exclusively on its internet site. Of course, one can hypothesize that for certain companies, for instance Amazon.com, a court may find its presence so systematic and pervasive as to subject it to general jurisdiction.  As business use of the Internet, or E-Commerce, becomes more pervasive, the idea of using the Internet as a means to assert jurisdiction is likely to seem less problematic to the court and the public.  However, for right now, courts consistently fail to find jurisdiction when the cause of action is unrelated to the a company's internet presence and the company's sole contact is its web site.

 In cases where plaintiff's seek specific jurisdiction, the majority of courts are taking the view that the more interactive the site, the more likely jurisdiction will be found.  The majority of courts follow the Zippo-Cybersell approach.  In Zippo Manufacturing Co. v. Zippo Dot Com, Inc., the court upheld jurisdiction in an action for trademark infringement by a Pennsylvania plaintiff against a California defendant which was an on-line Internet access and newsgroup provider.  The defendant had no offices or employees in Pennsylvania but had entered into agreements with seven Internet access providers in Pennsylvania to allow their subscribers access to defendant's news service.  About 3,000 subscribers (2% of the total) were Pennsylvania residents.

 The court found that the defendant's web site was insufficient basis for jurisdiction.  The Court reasoned, "The likelihood that personal jurisdiction can be constitutionally exercised based on entity's presence on Internet computer network is directly proportionate, in manner of sliding scale, to nature and quality of commercial activity that entity conducts over Internet."

 The court articulated three different levels that may be used to determine whether personal jurisdiction may be constitutionally exercised: (1) the defendant sells products or services into the forum jurisdiction or is otherwise actively doing business on the Internet, (2) the defendant maintains interactive web pages where users in the forum can exchange information with the host computer, and (3) the defendant merely maintains a "passive" web site that simply provides information or advertisements.  In the first two, jurisdiction is likely to be found; in the third it is not.

 In Cybersell, Inc. v. Cybersell, Inc., a domain name infringement case, the court, following Zippo, characterized the case as a type (3) case and held against jurisdiction.  It noted that the defendant had conducted no commercial activity in the forum, Arizona; that "(a)ll that it did was post an essentially passive home page on the Web ..." and it "did nothing to encourage people in Arizona to access its site, and there is no evidence that any part of its business ... was sought or achieved in Arizona ...[;] [it] entered into no contracts in Arizona, made no sales in Arizona, received no telephone calls from Arizona, earned no income from Arizona, and sent no messages over the Internet to Arizona."  The Court concluded that to allow jurisdiction in an action alleging trademark infringement on the Internet against an essentially passive web site "would automatically result in personal jurisdiction wherever the plaintiff's principal place of business is located."

 While most courts follow this approach, some set it aside if the harm occurs in the state. A problem with the majority view is that even a passive web site can cause harm to persons in the forum jurisdiction.  For example, a "passive" web site that contains defamatory statements,or reproduces a person's name or likeness in violation of a right of publicity or privacy, or posts a competitor's trade secrets, or includes a trademark or trade dress confusingly similar to the owner's, or reproduces beyond fair use a copyright owner's work, may cause harm simply upon being read by third persons.  In such cases, some courts employ a harm or effects test and find jurisdiction proper.

Some other trends are emerging as well.  For example, access, not the potential for access, is key.   The vast majority of cases where a court has found jurisdiction rely upon the fact that a certain number of residents, in fact, had accessed the defendant's Web site.  Also, if a company has non-Internet contacts and internet contacts, jurisdiction is more likely.  In many of the cases where personal jurisdiction was exercised, the courts considered the out-of-state company's non-Internet contacts (e.g., contracts with residents, toll-free telephone numbers, advertisements in forum publications, mailings into the state, etc.) as important factors.

Thus, the small start-up in California eager to create an interactive site should do so, but should also expect to defend suits in Illinois, New York and anywhere else the company's site may be accessed.  Small business are encouraged to review their internet site with counsel to see what, if anything, can be done to avoid such broad exposure.  Broad personal jurisdiction is, of course, not the only legal challenge the internet presents.  If a company is new to the internet, it should consult counsel to learn more about jurisdiction, copyright and other internet legal pitfalls.

© 1999-2008 Donahue Gallagher Woods LLP.  All rights reserved.